WASHINGTON—Banks and credit unions can do a lot more to serve the small-dollar loan segment, according to a brief just published by Pew Charitable Trusts.
The report indicates that consumers currently spend more than $30 billion annually to borrow small amounts of money from payday, auto title, pawn, rent-to-own, and other small-dollar lenders outside the banking system.
While noting that many credit unions and community banks already offer some small installment loans and lines of credit, the report added, “But because regulators have not yet issued guidance for how banks and credit unions should offer small-dollar installment loans, or granted specific regulatory approvals for offering a high volume of such loans, these programs have not achieved a scale to rival the 100 million or so payday loans issued annually.”
The opportunity for more banks and credit unions to enter the small installment loan market is not without its challenges, the report acknowledges.
“In order for these traditional lending institutions to seriously compete with the large number of payday and other nonbank small-dollar lenders that market aggressively, many banks and credit unions— especially large ones—would need not only to offer small-dollar loans but to make sure that consumers are aware that they offer such loans,” the Pew report states. “And banks and credit unions would need to compete with nonbank lenders on speed, likelihood of approval, and ease of application, because small-dollar loan borrowers usually seek credit when they are in financial distress.”
Experts in the CU small-dollar lending market, in previous reports, have told CUToday.info that speed in turning around these loans for members, as well as letting them know the loans are available, are critical to the success of a small-dollar loan program.
The Pew brief includes guidelines for banks and credit unions to follow as they develop new small-dollar loan programs.
To protect consumers and enable sustainability and scale for providers, Pew states that FIs should offer small installment loans or lines of credit with the following features:
- Affordable installment payments of no more than 5% of each paycheck or 6% of deposits into a checking account
- Double-digit APRs that decline as loan sizes increase
- Total costs that are no more than half of loan principal
- Loan payments that cannot trigger overdraft or nonsufficient funds fees
- Online or mobile application, with automated loan approval, so that loan funds can be quickly deposited into a borrower’s checking account
- Credit bureau reporting of loan terms and repayment